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November 14, 2012

What’s Next for IRS and Tax Planning? Commissioner’s Remarks Offer Some Hints

IRS Commissioner Douglas Shulman is retiring this month, but in a farewell address of sorts, he spoke before an AICPA gathering listing his and the IRS’ achievements during the past few years, but also gave some ideas of what the future may hold.

Positioning the IRS workforce to make sure that they are prepared for tomorrow’s challenges.

He then discussed the following, and what he felt should be future IRS focus and priorities:

A fundamental shift to a more global economy has created a real set of compliance challenges for the IRS. On the individual front, the IRS has made putting a big dent in offshore tax evasion a major priority.

During the past five years, the IRS has significantly increased resources to focus on offshore tax evasion, and the results have been substantial. They upped the ante in a meaningful way with their work with Swiss financial institutions, where for the first time in history, a bank secrecy jurisdiction turned over thousands of names and account numbers.

The IRS has also transformed its relationship with corporate taxpayers…many of whom operate in a global environment. One of the assumptions built into the dynamic was the so-called “adversarial relationship” between the IRS and taxpayers. This was one of those “givens”…the relationship would never change.

The Commissioner noted that the historic framework for the nation’s tax laws is a system of voluntary compliance. Our tax system is set up so that taxpayers fill out their own returns. Therefore it is the taxpayer, not the IRS, who possesses all the information relevant to tax liability. The IRS then uses information reported by the taxpayer to make judgments about issues to pursue, and returns to audit. Inherent in this system is the basic assumption that the taxpayer will be forthcoming and the government does not need to be an “adversary” in most situations.

The IRS now has a suite of different strategies, tools and programs that it has been applying during the past few years to transform this once unproductive relationship with corporate taxpayers. The tools include:

The CAP program, where the IRS works with corporate taxpayers to resolve all issues before a tax return is filed, so that when the taxpayer files a return, there is certainty

Fast track appeals process, where the IRS moves the administrative appeals process into an audit to try to resolve issues when they arise—rather than taking the issue through an appeals process after an audit is completed

The industry issue resolution program where the IRS produces guidance to taxpayers, mostly in the form of safe harbors, so they need not worry about later controversy.

The IRS also asked taxpayers to be more transparent by disclosing their uncertain tax positions, which they book as reserves on their financial statements. The end game is a more productive relationship, Shulman said, which allows the IRS to focus on corporate taxpayers and issues that pose the greatest compliance risk—and not spend time on taxpayers who pose a lesser risk of non-compliance.

The strategic priorities also focused on critical foundational operations and infrastructure, without which the IRS could not fulfill its mission. One of our most critical goals was modernizing the aging technology, with one critical program in particular: the core customer account database.

Shulman said it “is enormously gratifying” that the IRS successfully migrated from a weekly processing cycle to daily processing this year. This was a multi-year, “incredibly complex undertaking” that went to the heart of systems that process trillions of dollars in tax revenue.

The payoffs from this change, Shulman argued, are quicker refunds for taxpayers, up-to-date information at the fingertips of customer account representatives, and a platform for more real-time analytics and compliance. It is already benefiting taxpayers this year, he said, and will produce major benefits for the nation’s tax system.

Working With Paid Return Preparers The next key long-term priority, Shulman said, is an initiative that the IRS started more than three years ago to look at how the IRS interacts with paid tax return preparers.

In essence, the IRS shifted from a retail to a wholesale approach, shifting resources from dealing with taxpayers one-by-one to dealing with the intermediaries who deal with hundreds or thousands of taxpayers at a time.

Given the importance of paid return preparers to the integrity of the tax system, the IRS feels it is well into the process of ensuring a basic competency level for tax return preparers and focusing enforcement efforts on rooting out unscrupulous preparers. The IRS has registered over 850,000 return preparers and has begun administering a new competency test for any preparer who is not a CPA, attorney or enrolled agent. These individuals also have to complete 15 hours of continuing education each year using IRS-approved providers.

Once the majority of preparers are registered and have taken the test, the IRS will launch a public database so taxpayers can ensure that they are using a registered tax return preparer.

Data Analytics to Improve Ops The next major priority that the Commissioner mentioned is leveraging data analytics in order to continually improve operations.

He noted that the IRS has built a team with analytical expertise, and connected them with business units to continually improve operations. They are working on multiple fronts, and the results have been impressive.

Using better data on return preparers that the IRS has gained, the agency ran a pilot program applying advanced data analytics to link tax returns that showed potentially serious compliance issues to the individuals who prepared them. The IRS identified a number of preparers with apparently inaccurate returns and, depending on the type and severity of the issue, is applying different types of compliance tools.

Based on risk scoring, preparers with problematic returns received one of three treatments: due diligence visits, outbound phone calls or letters with monitoring.

This new test-and-learn methodology is one part of a greater trend of success that the IRS is having in implementing new filters to detect fraudulent returns and new processes for handling returns. It is now an organization, Shulman said, that is proficient at designing pilots to test new ways of doing business.

The IRS has also improved, he said, in moving more quickly to use data to focus its compliance efforts. This is a key part of an overall strategy that the IRS is pursuing to move the tax system to be more real-time oriented. In addition to making internal IRS operations more real time, the agency has opened a dialog with the practitioner community about how to engage practitioners and taxpayers in more real-time issue resolution.

Budget Savings; the Fiscal Crisis and Obamacare The Commissioner noted that, starting with fiscal year 2009 and running through the budget of next year, the IRS will achieve nearly $1 billion in budget savings and efficiencies.

The IRS is now recognized as a highly efficient and effective institution to carry out important and high profile government initiatives, Shulman said. Its portfolio of duties was greatly expanded during the economic crisis when the IRS was called upon to help revive the economy. For example, about one-third of the Recovery Act, or approximately $300 billion, ran through the tax system and the IRS.

The IRS has recently been asked to play a major role in implementing and executing the tax provisions of the Affordable Care Act (aka, Obamacare). For instance, Shulman noted it is working closely with the state and federal health insurance exchanges to provide hundreds of billions of dollars in tax credits through the exchanges to help people afford health insurance.

The Commissioner finally mentioned that it is also his desire that Congress keep a keen eye on tax legislation that adds to complexity, and is difficult for taxpayers to comprehend and for the IRS to administer.

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